Companies Turn to Grades, And Employees Go to Court

By REED ABELSON

Published: March 19, 2001

An increasingly popular technique for evaluating employees is prompting lawsuits charging discrimination at three big companies.

At issue is the ranking of managers, professionals and sometimes lower-level employees from best to worst, or grading them on a bell curve, and then using that ranking to help determine pay and sometimes whether to fire someone.

In their suits, all filed over the last year or so, employees at Microsoft, Ford Motor and Conoco say the rating systems are unfair because they favor some groups of employees over others: white males over blacks and women, younger managers over older ones and foreign citizens over Americans.

A growing number of companies are turning to grading systems, also known as forced rankings or distributions, as a way of making sure managers evaluate employees honestly and make clearer distinctions among them. At companies that do not compare employees with one another this way, nearly every employee can come away feeling above average, like the children of Lake Wobegon. But under the grading system, managers are forced to identify some people as low performers.

At General Electric, for example, supervisors identify the top 20 percent and bottom 10 percent of their managerial and professional employees every year. The bottom 10 percent are not likely to stay.

As John F. Welch Jr., General Electric's chief executive, wrote last month to shareholders, ''A company that bets its future on its people must remove that lower 10 percent, and keep removing it every year -- always raising the bar of performance and increasing the quality of its leadership.''

Ranking or grading employees is also common at technology companies like Cisco Systems and Hewlett-Packard. But recently the concept has been catching on more broadly, according to management consultants. One reason is that as the economy slows, companies often lay off employees. Cisco, for example, announced earlier this month that it would let go as many as 5,000 workers -- and would use grading as one way to identify people to lay off.

''Companies are playing their version of 'Survivor,' '' said David Thomas, a professor at the Harvard Business School.

Another reason is that some companies are eager to copy Mr. Welch, long viewed as one of the most successful managers in America.

Defenders of these systems say anyone who gets a low grade is likely to view the process as unfair. '' 'A' students love grades; 'F' students hate grades,'' said John Sullivan, a human resources professor at San Francisco State University.

But the techniques, which some employees label with terms like ''rank and yank,'' have come under sharp criticism. While they appear to offer an objective way to judge employees, they can be vulnerable to bias, Mr. Thomas said. Managers may stereotype employees when evaluating them on vague criteria like career potential -- deciding that older workers, for example, may have a harder time keeping up with new technology.

In some cases managers can view these systems ''as a tool to be used to weed out the ones you don't want,'' said Thomas S. McLeod, a lawyer in Canton, Mich., who represents employees suing Ford in another case.

Critics of the system also argue that companies should not apply a bell curve, in which a small number of employees get the highest and lowest rankings and a much larger number are grouped in the middle. The bell curve model assumes a normal distribution among a very large group of random individuals, not small groups.

What is more, across a company, people who belong to a particularly talented unit will suffer if a certain number of them must be given poorer grades than they would get in another unit.

''You end up with dysfunctional results,'' said Edward E. Lawler III, a business professor at the University of Southern California.

Some lawsuits contend that Microsoft's grading systems are discriminatory. One, filed last October, seeks class-action status on behalf of blacks and women. The suit states that the rating system ''permits managers, who are predominantly white males, to rate employees based upon their own biases rather than based upon merit.''

According to the lawsuit, employees are rated on a five-point scale, with only a certain percentage permitted to receive each score. Employees doing the same job in the same unit are also given a ''stack ranking,'' from most to least valuable. Managers decide those rankings largely using what are called ''lifeboat discussions,'' where they choose which employees they would want with them if stuck in a lifeboat. Managers had no other clear criteria, according to Christine Webber, a lawyer at Cohen, Milstein, Hausfeld & Toll who is representing the employees.

Grading is highly subjective at Microsoft, according to Peter M. Browne, a former executive who is also suing the company, charging discrimination. Mr. Browne, who is black, said managers were forced to use a curve in evaluating even small groups. He said he had to rate a group of five on a curve, for example, in deciding which ones would not receive stock options.